Better Pre Trade Risk Might Have Helped Citi Australia

ASX Disciplanry TribunalThe ASX Disciplinary Tribunal recently slapped Citigroup Global Markets Australia (CGMA) with fines totaling $50,000 for two separate trading incidents that occurred in 2008. The first event transpired on May 16 in the futures segment. 250 lots of the December 90 day bank bill futures (IRZ8) were incorrectly entered to buy at 92.68 when in fact the client was willing to pay only 92.28. The second occurred October 15 when another wrong price was entered to cross an order at $4.85 but was sent with a price of $1.85 subsequently causing the name to sell down to $1.85 (down 62%). On the trading desk trading errors occur from time to time and are a part of the business but I just wanted to highlight the importance of pre-trade risk to limit or prevent them entirely.

If we look at the second scenario where the name sold down 62% there was clearly a problem with pre-trade risk being poorly instituted despite the erroneous price entered by the trader. Where should the blame lie? With Citi or the Exchange? Apparently, the trader received 2 system warnings before pushing the order through but if the ASX likes to keep markets orderly and fair you would think that the exchange would have rejected this order all together. Some exchanges will only let you enter orders within a certain number of spreads of the last price or they are rejected. Also, the ASX doesn’t have any circuit breaker limits where prices moving above or below a certain percent will cause a trading halt. Of course it’s the members responsibility to ensure that orders don’t cause these kinds of scenarios to take place.

Some exchanges (and the ASX is one of them) don’t allow market orders designed to prevent adverse price movements in securities so, instead, clients will place aggressive limit orders to make sure they complete the trade. While this was not the case with the futures order there was nothing that Citi could have been done to prevent this trading error from happening save the correct price being entered to begin with. However, 250 lots is quite a large order though (AUD 230 million notional and ~4% ADV) so a “fat finger” limit at either the firm level or at the trader level could (should) have been put in place to reduce the number of contracts per trade. The cost of the trade was AUD1 million but would have been much less with a fat finger limit.

Pre-trade risk is very important indeed and should be seriously and vigorously instituted at every firm otherwise it could cost the firm fines, credibility and the cost to back out errors.

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